3 Signs It's the Wrong Time to Refinance Your Mortgage
by Maurie Backman | Updated July 19, 2021 - First published on Feb. 7, 2021
Thinking of getting a new home loan? You may want to hold off.
There's a reason so many homeowners have been eager to refinance their mortgages. Refinance rates have been sitting near record lows for months. As such, a lot of borrowers stand to lower their mortgage costs by swapping their existing home loans for new ones. But before you rush to refinance, you'll want to make sure it's the right move for you. And if the following scenarios apply, it may not be.
1. Your credit score just took a dive
Generally, the whole point of refinancing is to reap savings by lowering the interest rate you pay on your mortgage. That, in turn, could result in a much lower monthly payment. But you're only likely to snag a competitive interest rate on a refinance if your credit score is in great shape. And if yours plunged recently -- say, because you were late with a number of bills or racked up too high a balance on a credit card -- it's not the best time to refinance. Instead, you should work on boosting your score and then apply to get a new home loan.
2. You just took on another loan
To qualify for a mortgage refinance, you'll need to show lenders you're not overly loaded with debt. If your debt-to-income ratio is too high, it's a red flag that you may risk falling behind on your mortgage payments. As such, if you recently took out another large loan -- say, an auto loan -- you may want to put that refinance application on hold. Alternatively, you can pay off some existing debt -- say, a large credit card balance -- and then apply to refinance so your debt-to-income ratio isn't so bad.
3. You're thinking of moving
There's one downside to refinancing a mortgage: You'll need to pay closing costs to get a new home loan. Those costs can vary by lender, but they'll typically equal 2% to 5% of your loan amount -- not a small amount. Furthermore, your closing costs will eat into your mortgage savings so you'll only really come out ahead financially in a refinance once you've broken even from those fees. If you don't plan to stay in your home for very long, you may never break even at all.
Let's say you're looking to refinance a $200,000 mortgage whose closing costs amount to $6,000. Let's also assume you can lower your loan's interest rate enough to reduce your payments by $300 a month. That's a lot of savings, but it will still take 20 months to break even. If you think you might move within the next two years, refinancing isn't worthwhile.
Refinancing could result in a world of savings, especially if you're able to lower your loan's interest rate substantially. But before you apply, make sure the timing is right and that getting a new home loan is actually a smart move for you. You may find you're better off waiting or sticking with your existing loan after all.
The Ascent's Best Mortgage Lender of 2022
Mortgage rates are on the rise — and fast. But they’re still relatively low by historical standards. So, if you want to take advantage of rates before they climb too high, you’ll want to find a lender who can help you secure the best rate possible.
That is where Better Mortgage comes in.
You can get pre-approved in as little as 3 minutes, with no hard credit check, and lock your rate at any time. Another plus? They don’t charge origination or lender fees (which can be as high as 2% of the loan amount for some lenders).
About the Author
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.